Audit planning

Question 1

Why do we need audit planning?

Answer 1

To ensure all areas are considered appropriately, identify potential problems, organised, managed.

Question 2

What is audit risk?

Answer 2

Risk that the auditor expresses an incorrect opinion.

Question 3

Planning involves - Audit strategy

Answer 3

Determines scope, timing and direction.

• identify relevant characteristics of engagement
• reporting dates
• materiality, preliminary risk + test of internal control

Question 4

Planning involves - Audit Plan

Answer 4

Increased detail, sets out the nature, time and extent of procedures to obtain sufficient evidence.

• shows how, what, who and when
• outlining audit tests
• other procedures

Question 5

How can the auditor understand the entity?

Answer 5

By making inquiries about management, analytical procedures, observation and discussion.

• important to identify issues when collecting evidence
• customers/suppliers
• organisational structure
• objective (are they profit seeking?)

Question 6

What is an Analytical procedure, AP?

Answer 6

Evaluation of financial information through analysis of plausible relationships between normal and non-financial data.

Question 7

Preliminary AP

Answer 7

MUST be used in the planning stage.

Question 8

Substantive AP

Answer 8

MAY be used in evidence gathering.

Question 9

Review AP

Answer 9

MUST be used in the overall conclusion.

Question 10

What are the limitations of an AP?

Answer 10

• They require knowledge/experience of the entity, which may be limited in the 1st year of audit.
• Experienced staff required
• Quality of AP depends on reliability of source data.

Question 11

What do you need to perform an AP?

Answer 11

You need to understand the business, then develop an expectation.

They can do this by using things such as budgets, interim accounts, management accounts, VAT returns and non-financial info like board minutes notes taken at meetings.

They can compare results to expectation and unexpected variations create an audit risk.

Question 12

What is materiality?

Answer 12

Defined as an expression of relative significance of a specific matter in context of financial statements as a whole. (Does the mistake really matter?)

Materiality is a matter of judgement; it may vary between different users of financial statements.

Question 13

What happens in the planning stage with materiality?

Answer 13

Materiality in planning stage drives the level of work to be carried out. It determines the evaluation of audit evidence. If a material misstatement is discovered then adjustments to financial statements should be requested.

• helps decide how many/what items to examine
• whether to use sampling techniques
• what level of misstatement is likely to lead a negative view.

Question 14

What is performance materiality?

Answer 14

Amount set by the auditor at less then materiality for financial statements as a whole. Reduces the probability that the total of uncorrected and undetected misstatements exceed materiality for financial statements as a whole to a low level.

Gives a margin of safety that undetected misstatements are less likely to exceed materiality.
They are not looking for errors but looking for materiality misstatement.

The higher the risk the lower the performance materiality.

Materiality should be established then revisited during the audit if necessary.